Bridging the Gap How to Finance the Net Zero Transition 2025

Some examples of climate-focused regulation include financial disclosure requirements (mandating companies to disclose climate-related financial risks) and green finance regulations and taxonomies (establishing standards for sustainable investment instruments). Both these sets of regulations encourage transparency and accountability, help investors understand the environmental risks in their portfolios and thus facilitate informed decision-making. Energy efficiency standards, tax incentives and mandatory risk assessments are some of the other relevant regulatory routes that can help reduce the transition finance gap, conserve resources and promote a more sustainable economic model. Implementing regulatory mechanisms poses distinct challenges in both developed and developing countries. In developed nations, the main complexity lies in overcoming entrenched interests, regulatory inertia and the integration of new policies into existing frameworks without causing significant economic disruption.102,103 Meanwhile, developing countries face obstacles such as limited institutional capacity, insufficient financial resources and the need to balance growth with sustainability.104 The disparity in technical expertise and infrastructure further complicates the uniform application of much needed regulations, often leading to uneven progress in global sustainability efforts.105 These challenges can be overcome by fostering international cooperation, enhancing capacity- building efforts, securing adequate financial resources and tailoring regulatory frameworks to local contexts.106,107 The integration of robust regulatory frameworks is essential for a global shift towards a low-carbon global economy. By enforcing financial disclosures, streamlining processes, incentivizing green investments and strengthening environmental regulations, policy-makers can effectively mobilize the necessary resources to achieve climate goals. These strategic levers not only guide investments but also ensure that the transition to a sustainable future is equitable, efficient and aligned with the broader objectives of environmental preservation and economic resilience. Yet regulatory interventions in themselves are only a first step to bridging the transition finance gap and addressing the externality imposed by climate change. As an example, the United Kingdom financial services regulator, the Financial Conduct Authority (FCA), introduced a rule aimed at enhancing climate-related disclosures by premium listed companies in January 2021 and has recently concluded consultations on additional proposals to strengthen disclosure. Crucially, these rules will facilitate reporting on the emission intensity of companies’ value chains, which in turn signals their exposure to climate risks and, theoretically, impacts their cost of capital. The inability of asset managers, banks, investors and consumers to obtain information on these risks as part of the global financial system constitutes a negative externality that drives emission-intensive activities and climate change. The FCA’s rules and others similar to it will only go so far towards addressing the issue, but without the emergence of a private sector-led agenda to improve disclosure regimes and generate accessible data, the information required for efficient climate risk-resilient asset allocation and consumer consumption decisions will continue to elude stakeholders. Bridging the Gap: How to Finance the Net-Zero Transition 15